BUSI 687 Week 6 DB Forum 5 Example

Discussion Board Forum 5: Thread and Replies

BUSI 687 Insurance & Risk Management, Discussion Board Forum 5 (thread and two replies)

Thread by [Student Name]

The forum topic, the homeowners and the classmates are composites standing in for the course's own; the program limits described are those of the National Flood Insurance Program, and the textbook and research cited are real; the requirements follow Liberty's public course guide for BUSI 687.

Thread

The topic asks what a standard homeowners policy leaves out. I chose a composite couple in suburban Houston whose house sits in a moderate-risk zone, just outside the mapped 100-year floodplain. Their lender does not require flood insurance, and their homeowners policy, like almost every standard form, excludes flood. Dalton et al. (2018) explain that homeowners forms cover a broad list of perils but exclude losses that are catastrophic or correlated across many policyholders at once, flood and earth movement among them, which is why separate coverage exists.

The separate coverage usually comes from the National Flood Insurance Program, which offers up to $250,000 on the building and $100,000 on contents for a home, and a new policy generally takes effect only after a 30-day waiting period. That waiting period matters: buying coverage when a hurricane is already in the Gulf is too late. Flood coverage also has limits a planner should explain, such as restricted coverage for basements and the fact that contents coverage must be bought separately from building coverage.

Why do so few homeowners in moderate-risk zones buy flood coverage? Gallagher (2014) found that flood insurance purchases spike in the year after a flood and then steadily decline to their earlier level, and that even nearby communities not flooded increase purchases, though less. People learn from floods and then forget. Kousky (2018), reviewing the National Flood Insurance Program, discusses low take-up as one of the program's central problems, along with the difficulty of communicating risk through flood maps that many people read as a line between safe and unsafe. A line on a flood map tells you how likely water is to reach the line, not whether it will stop there.

My neighbor in a similar zone learned this the hard way. When a slow-moving storm flooded our street, his house took in eight inches of water, and without flood coverage he paid for new floors, drywall and furniture from savings and a disaster loan.

I would recommend that the couple buy a flood policy now, with building coverage near the cost to rebuild their lower floor and contents coverage for what they keep there, and that they review the premium each year against private flood options that have become available in Texas. Because coverage in moderate-risk zones is often priced well below high-risk coverage, the cost is likely modest compared with a single uninsured flood.

Reply to Brianna

Brianna, your thread on your parents' home in the San Francisco Bay Area made a strong case that earthquake is the gap that matters most there, since standard homeowners policies exclude earth movement just as they exclude flood. Dalton et al. (2018) treat earthquake coverage as a separate endorsement or policy because, like flood, the losses are catastrophic and strike many insureds at once. Your parents' choice, after weighing it for some time, to skip it because premiums and the deductible, often 10 to 20 percent of the dwelling coverage, seemed too high is understandable. Still, the research on flood behavior suggests a pattern worth watching. Gallagher (2014) found that people buy coverage after a disaster nearby and then let it lapse as the memory fades, which means the decision often reflects how recently a disaster occurred rather than the underlying risk. For your parents, the right question is what a major quake would cost them relative to their savings, not how expensive the premium feels. If their home equity is most of their wealth, a policy with a high deductible may still protect them from total loss at a manageable price. Kousky (2018) notes that for flood the private market has grown alongside the public program, and the same comparison shopping applies to earthquake coverage. A planner could price both the state program and private options and show your parents the cost of each next to the equity at risk. Would they reconsider if the premium were framed against the value of the house rather than against their monthly budget, perhaps with a higher deductible to keep the cost down?

Reply to Jamal

Jamal, you wrote about your own situation as a renter and argued that renters insurance is a low-cost way to transfer the risk of losing personal property, which your thread showed with your stolen laptop and bicycle. I agree, and your point that the landlord's policy covers the building but not your belongings is one many renters miss until a loss teaches them. Dalton et al. (2018) note that renters policies also include personal liability coverage, which may matter more than the property coverage. If a guest is injured in your apartment or a fire spreads from your unit, the claim could far exceed the value of everything you own, and liability coverage pays for your defense and any judgment up to the limit. Many renters choose the lowest liability limit without noticing it, because the online quote form fills it in by default. Gallagher (2014) found that people tend to buy insurance after they or their neighbors experience a loss and let it lapse as time passes, which is exactly how your laptop theft prompted your purchase. Renters should also check whether their policy covers sewer backup and whether flood is excluded, since a ground-floor apartment in a flood-prone area faces the same gap Kousky (2018) describes for homeowners, and renters can buy contents coverage through the National Flood Insurance Program. Raising liability coverage from $100,000 to $300,000 usually costs only a few dollars a month. Your experience with the theft shows you already think about risk, so this would be a small step. Have you looked at the liability limit on your policy since the theft?

References

Dalton, M. A., Dalton, J. F., & Langdon, T. P. (2018). Insurance planning. Money Education.

Gallagher, J. (2014). Learning about an infrequent event: Evidence from flood insurance take-up in the United States. American Economic Journal: Applied Economics, 6(3), 206-233. https://doi.org/10.1257/app.6.3.206

Kousky, C. (2018). Financing flood losses: A discussion of the National Flood Insurance Program. Risk Management and Insurance Review, 21(1), 11-32. https://doi.org/10.1111/rmir.12090